In re Janssens

449 B.R. 42

In re Joseph W. JANSSENS, III, Debtor.Freedom Medical, Inc., Plaintiff

v.Joseph W. Janssens, III, Defendant.

Bankruptcy No. 07–23222–JS.

Adversary No. 08–0225–JS.

United States Bankruptcy Court, D. Maryland.

June 15, 2010.

Charles Frederick Obrecht, Jr., Esquire, Obrecht and Obrecht, Severna Park, MD, Edward T. Kang, Esquire, Weir & Partners, LLP, Philadelphia, PA, Gregory H. Mathews, Esquire, West Chester, PA, for Plaintiff.Lori S. Simpson, Esquire, Bishop, Daneman and Simpson, LLC, Baltimore, MD, James P. Golden, Esquire, Jane C. Silver, Esquire, Hamburg & Golden, P.C., Philadelphia, PA, James L. Lekin, Esquire, Cockeysville, MD, for Defendant.Joseph J. Bellinger, Esquire, Offit Kurman, Maple Lawn, MD, Chapter 7 Trustee.Mark A. Neal, Assistant U.S. Trustee, Office of the U.S. Trustee, Baltimore, MD, for U.S. Trustee.

MEMORANDUM OPINION GRANTING COMPLAINT TO DETERMINE DEBT TO BE NONDISCHARGEABLE IN THE AMOUNT OF $189,375.93

JAMES F. SCHNEIDER, Bankruptcy Judge.

The instant complaint to determine nondischargeability of debt came on for trial. For the reasons stated, the complaint will be granted and a debt in the amount of $189,375.93, will be determined to be nondischargeable.

FINDINGS OF FACT

1. The plaintiff, Freedom Medical, Inc. (“Freedom,” or “the plaintiff”), is a Pennsylvania corporation located in Exton, Pennsylvania, that at all relevant times was engaged in the business of buying, refurbishing, renting and selling biomedical equipment. Adversary Complaint, ¶¶ 5 and 9. Freedom was founded in 1997 by Frank Gwynn (“Gwynn”), president, and Dominic Greco (“Greco”), the chief executive officer. Freedom Medical, Inc. Private Placement Memorandum dated November 1, 2004, at P. 16, Plaintiff's Ex. No. 36.

2. The debtor/defendant, Joseph W. Janssens, III (“Janssens,” or “the defendant”) was employed full-time from August 2000 until April 2006, by Freedom as the regional manager of its branch office located in Baltimore, Maryland.

3. At the time Janssens was hired by Freedom, he signed an employment letter that indicated that customer contacts of Freedom represented confidential proprietary information; the use of which was limited exclusively for the benefit of Freedom.¹

4. Freedom also advised Janssens that the company's employee handbooks and its acceptable use policy described such information as proprietary information to Freedom. Freedom Medical, Inc. Employee Handbook, Plaintiff's Ex. No. 4–6; Freedom Medical, Inc. Acceptable Use Policy, Plaintiff's Ex. No. 8; and Acknowledgment by Janssens of receipt of Freedom Medical Employment Policies, Plaintiff's Ex. No. 2.

5. Janssens also entered into an agreement with Freedom entitled “Non–Disclosure, Non-compete, Property Rights Agreement” dated August 28, 2001, Defendant's Ex. No. 2.²

6. In 2004, Freedom began to experience declining revenue. The revenue of the Baltimore branch which Janssens managed declined from $1.5 million in 2003 to $1.1 million by 2006. Affidavit of Frank Gwynn dated March 30, 2007, at 4, Defendant's Ex. No. 32.

7. On December 29, 2004, Freedom filed a voluntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Pennsylvania, Case No. 04–37092–BIF. During the pendency of the Chapter 11 proceeding, Freedom neither assumed nor rejected the agreements with Janssens. The case was closed on June 21, 2006.

8. Gwynn and Greco investigated the reasons for the diminution in Freedom's revenue. Between 2004 and 2006, they met with Janssens in an attempt to determine the reasons for the decline. Transcript, P. 42, line 10 [P. 72]. At a meeting in the summer of 2005, they asked Janssens directly whether he was working outside of the business, which Janssens denied and said that he was “trying his best to build the business of Freedom Medical.” Transcript, p. 45, lines 16–24 [P. 72]. As a result of these and other meetings Gwynn came to believe that Janssens was “asleep at the wheel.” Transcript, 46, line 20 [P. 72].

9. In 2006, based upon the decline of sales at the Baltimore branch, Gwynn and Greco concluded that Janssens was “completely inattentive to the business, and he needed to be replaced.” Transcript, 54, lines 20–21 [P. 72]. On April 7, 2006, Freedom terminated Janssens' employment. Transcript, 55, line 25 [P. 72].

10. In May 2006, Freedom learned that items of its equipment that was missing was being rented by another entity that employed some of Freedom's former employees. Transcript, 56, lines 6–9 [P. 72]. Freedom hired a private investigator to investigate possible wrongdoing by its employees and former employees. Transcript, PP. 56–57, lines 16–19 [P. 72]. During the course of the investigation, Janssens' replacement as supervisor of the Baltimore branch learned that Janssens had been diverting business from Freedom to its competitors. The investigation disclosed that in 2004, Janssens began diverting corporate opportunities by using the customer contacts of Freedom and conveying those business leads to Quality Medical South ³ and Quality Medical Group (collectively referred to hereafter as “Quality”). Evidence disclosed a pattern of misconduct whereby Janssens solicited business from customers of Freedom on behalf of Quality and sold or rented equipment to them. Transcript, 70–71, lines 11–14 [P. 72].

11. In July 2006, Freedom sued Janssens and 22 other defendants in the United States District Court for the Eastern District of Pennsylvania in a suit styled Freedom Medical, Inc. v. Gillespie, et al., Case No. 06–3195 (“Suit No. 1”), in which Freedom charged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), conspiracy, fraud and breach of fiduciary duty. Suit No. 1 was dismissed against Janssens at summary judgment “without prejudice for lack of jurisdiction.” Memorandum and Order dated September 14, 2007 in Freedom Medical, Inc. v. Gillespie, et al., Case No. 06–3195, Plaintiff's Ex. No. 30.

12. During the pendency of Suit No. 1, Janssens acknowledged in a deposition that he was aware that any work he performed for another entity while he was employed by Freedom should have been disclosed to Freedom. Deposition Transcript of Joseph Janssens dated February 26, 2007, taken in Freedom Medical, Inc. v. Gillespie, et al., Case No. 06–3195, at 54, lines 6–15, Plaintiff's Ex. No. 3. Janssens admitted that his supervisors at Freedom would not have been “thrilled about it” and would not “have agreed with my assessment” that diverting corporate opportunities actually helped Freedom. Id. at 57, lines 9–19.

13. Freedom alleged that from March 1, 2004, until Janssens was terminated in April 7, 2006, he diverted approximately $649,407.81 worth of business from Freedom to Quality. From March 1, 2004, until April 7, 2006, Freedom paid Janssens $189,375.93, in salary and commissions. Janssens' W–2 Forms for 2004, 2005 and 2006, Plaintiff's Ex. No. 10. Quality paid Janssens commissions at rates ranging from 5% to 10% on gross revenues generated from the various transactions he conducted on behalf of Quality. Rule 26 Disclosures of Quality Medical Group, Inc., with attachments, filed in Freedom Medical, Inc. v. Janssens, et al., Case No. 07–4286, Plaintiff's Ex. No. 4–8. These commission rates were paid at a rate greater than that paid to Janssens by Freedom. Transcript, 74, lines 12–25 and 79, lines 1–2 [P. 72].

14. Janssens admitted diverting corporate opportunities from Freedom to Quality. Deposition Transcript of Janssens, dated September 26, 2008, taken in the instant adversary proceeding with exhibits, at 76, lines 1–7; 82, lines 19–21; and at 83, lines 1–9, Plaintiff's Ex. No. 4. Janssens claimed that in so doing, he was protecting Freedom by diverting to Quality those types of business or services in which Freedom was either not interested or was unable to perform.

15. Freedom disputed this assertion. Eric Wenzel (“Wenzel”), Chief Financial Officer of Freedom, testified that between 2004 and 2006, Freedom had between 25,000 and 27,000 pieces of biomedical equipment to meet their clients' rental needs. Transcript, 16, lines 22–25 and 17, lines 1–10 [P. 73]. During this period, Freedom's biomedical equipment had a utilization rate of between 38% and 43%. In cases where an item of equipment could not be found at the local branch, Wenzel testified that Freedom had a procedure whereby salespersons were directed to contact the company's asset management department, which in turn would locate or purchase the requested items. Transcript, 36, lines 20–25 and 37, lines 1–14 [P. 73]. Janssens did not follow the procedure. At trial, on the issue of a standard rental where the equipment might have been in Freedom's inventory but could not be found locally, Janssens could not recollect one instance where management was unable to meet the client's needs. Transcript, 202, lines 11–15 [P. 73].

16. Contrary to Janssens' assertion that Freedom was no longer interested in servicing its clients' medical equipment, Freedom offered its Preliminary Private Placement Memorandum (“PPPM”) to potential investors, which stated: “We provide a full range of biomedical equipment related to services, including equipment delivery, inspection, maintenance, preventative maintenance, logistical services, repair, and documentation.” PPPM dated November 1, 2004, at 30, Plaintiff's Ex. No. 36. The PPPM also described the Freedom support staff associated with these services, including “18 sales representatives, 15 customer service representatives and 42 biomedical technicians.” Id. As of August 31, 2004, Freedom attributed 5.7% of its revenue to the servicing of biomedical equipment. Id. at A–3.

17. In December 2004, Janssens diverted a $90,000 sale of medical equipment for Integrated Medical Systems (“IMS”) to Quality. Purchase order dated December 29, 2004, Plaintiff's Ex. No. 42. In his deposition taken in Suit No. 1, Janssens testified that Mr. Pat Dorio of IMS “made it...